The Social Protection and Labor Global Practice at the World Bank recently completed a Jobs Diagnostic in Kenya to look at ways that the country can create better jobs, especially for young Kenyans. The report produced from this diagnostic, ‘Kenya – Jobs for Youth’, shows that the lack of good jobs is slowing down poverty reduction and is an increasingly important concern for the young population. Good jobs are fundamental to development.

For Kenya’s economy to create better jobs, there needs to be a thriving private sector. The private sector employs people in more productive jobs. In addition, labor productivity is much higher in the formal than in the informal sector in Kenya. Within the private formal sector, more productive and more established firms offer better job conditions and higher wages. However, entrepreneurship and expansion are difficult, especially for the most productive and competitive firms.

The formal private sector is still small and accounts for less than one in four jobs outside farming. Formal wage jobs make up 22 percent of all jobs in industry and 24 percent of all jobs in the services sector. Finding ways to remove obstacles to firm and labor demand growth is essential to improving the jobs landscape in Kenya.

Here are some of our findings:

Firm creation is low in both the manufacturing and services sector in Kenya: less than 20 percent of manufacturing and services firms are younger than 5 years, compared to 35 percent in the United States and Ethiopia. Whether this is due to barriers to entry or barriers to formalization is not clear. In OECD Countries, young firms contribute disproportionately to job creation.

More productive firms do not create more jobs. In fact, the relationship between firm size and productivity growth is negative. This is especially true for the food and textiles sectors, the major employers in the manufacturing sector. We also found that firms with lower productivity levels employ more workers than those with higher levels of productivity.

The lack of growth of the more productive firms is the real challenge, even though formal firm creation has recently picked up in Kenya. These allocative inefficiencies are constraining the ability of the manufacturing sector to contribute to the government’s employment objectives. Removing the constraints that prevent greater allocative efficiency could substantially boost productivity and employment. Evidence from other countries suggest that the possible culprits are trade policy, the regulatory framework related to business environment (including competition policy); and market failures related to access to finance and labor market distortions. More research is needed to assess the prevalence and magnitude of these distortions in the context of Kenya.

Skills development is also fundamental to the transition to better jobs. There are signs that skills are becoming a more important problem for firms: 30 percent of firms cite it as a major constraint. A transformation into more formal, higher productivity jobs will require a better trained labor force.

Other measures that could help create better jobs in the formal private sector include:

1. helping firms access skills, technology and information, for example through technology transfer programs

2. reducing regulations and improving their enforcement to get a level playing field between the informal and formal sectors

3. decreasing the cost of doing business by improving the electricity supply and access to finance

4. making it easier to start a business and simpler to wind one up will increase firm entry and exit

5. making it easier for firms to raise money

Why is it so important to improve the quality of jobs in Kenya? After all, the country has created many new jobs. Between 2006 and 2013, this amounted to an impressive 800,000 jobs per year. Employment grew by 4.5 percent per year, far exceeding the 2.8 percent rate at which the working age population grew. But this high growth was not enough to make a sizeable dent in unemployment and underemployment.

A majority of Kenyans do work, notwithstanding high unemployment and inactivity rates. But Kenyan workers are predominantly locked into low productivity jobs and sectors. Between 2006 and 2013, value added and total employment increased at roughly the same rate. As a result, value-added per worker – a measure of labor productivity – remained stagnant, limiting the potential for improving earnings.

Economic growth in Kenya has been fueled by public investment in infrastructure, including railways, roads and energy, and domestic consumption. While this model has generated high economic growth, and also jobs, those jobs have not been sufficiently productive.

We decomposed the sources of growth and found that labor productivity contributed very little to driving economic growth. This was driven by increases in employment. So although Kenyans were offered more jobs, those jobs were not significantly better than before. The very small contribution of labor productivity to overall value added growth was almost entirely driven by workers changing sectors, in particular from agriculture to services.

Kenya’s Vision 2030 aims to “transform Kenya into a newly industrializing, middle-income country providing a high quality of life to all its citizens”. Kenya means to achieve this by building a globally competitive and prosperous economy, a just and cohesive society as well as a democratic political system that protects rights and freedoms of every individual. Better, more productive, transformational jobs will be key to realizing this vision.